Working Out The Costs Of Obama’s Grand Tax Cut Bargain

This afternoon, the Republican and Democratic caucuses in both the House and the Senate will huddle to discuss President Obama’s “framework” proposal for cutting taxes and stimulating the economy next year. Of course, since this is Washington, they won’t know the exact cost of the proposal they are debating.

They will know, however, that all of the money to pay for the proposal will come from borrowing against the earning power of future generations. This is not necessarily a terrible thing. Like the 2009 Recovery Act, there are good reasons for the government to do short term borrowing to avoid deep recessions and therefore boost longer-term growth. As a senior administration official said artfully to reporters last night, “These are responsible, temporary measures that support our economy but will not add costs by the middle of the decade.” They are temporary, yes. Responsibility is, of course, a matter of judgement.

So how much will it all cost. White House aides say they don’t know exactly and don’t want to speculate. But there is enough information in the public domain to make a good guess.

The New York Times does a back of the envelope calculation and comes to about $900 billion. CNN puts the number at about $800 billion. It is notable that both figures are bigger than the $787 billion that the Recovery Act cost in 2009, a bill that helped to birth the Tea Party protest movement. But, to be fair, some of these costs would have been spent either way. To use the CNN figures, $383 billion goes to extending Bush tax cuts for incomes under $250,000, a move that is supported by both Democrats and Republicans. If we assume that this cost was already baked into the cake, then we are left with a compromise cost of about $417 billion over two years.

In the president’s telling of this compromise tale, both sides gave a little. Obama says he made two major concessions to Republicans: Extending tax breaks for the wealthiest Americans and lowering the Estate Tax rate more than he had hoped. According to the CNN calculations, the cost of the tax cuts for the wealthy is about $75 billion. The cost of the Estate Tax change to 35 percent with a $5 million exemption is about $88 billion, compared with current law. But Obama supports a lower rate than current law (45 percent with a 3.5 million exemption), which would cost about $45 billion, so he is really only giving up about $43 billion here. In total, that puts the amount of money Obama is borrowing against his will at $118 billion over two years.

But Obama says he is getting something in exchange for this money, namely a number of provisions that would more directly help the middle class and stimulate the flagging economy. They could be fairly characterized as Obama priorities. They include a $120 billion one-year cut to payroll taxes, a $56 billion 13-month extension of unemployment benefits, about $40 billion in tax credits for students and parents with children and others, as well as a number business tax breaks, including accelerated depreciation, that are more difficult to estimate. This all adds up to more than $206 billion.

Now this math comes with some big qualifications. First, it is possible that Republican leadership would have supported the payroll tax cut and business tax breaks next year, at minimum, even without a grand bargain over the top tax rates. Second, these are very rough numbers.

But given those qualifications, the trade-off looks like this: President Obama gave up campaign promises worth $118 billion in exchange for middle class stimulus measures worth at least $206 billion. And the American people will go into debt another $324 billion or more to make it all happen, though some of that money may flow back to the Treasury in the form of increased economic performance down the road.

UPDATE: The liberal Center for American Progress uses slightly different numbers to reach the conclusion that the plan will save or create about 2.2 million jobs.